TAKING COUNSEL: Fight against money laundering and terrorism financing

  • 2007-08-29
  • by Annika Vait [Teder, Glikman & Partnerid]
The fight against terrorism is one of the primary goals of the European Union and includes measures against money laundering and terrorism financing.

Estonia has adopted the relevant conventions within the framework of combating money laundering and terrorism financing. The main domestic law is the Money Laundering and Terrorism Financing Prevention Act, which went into force in 1999. Although this act has been amended several times, it is still not in compliance with EU directives and has not sufficiently taken into account suggestions by the Financial Action Task Force.

In order to rectify the situation, a new draft law on preventing money laundering and terrorism financing has been compiled by the Ministry of Justice. Although only in the initial stage, the draft is a significant improvement to the present regulations.

The draft law is, according to preliminary information, the state's first step against SMS loans, which as of late have been criticized widely. The draft law affects non-credit institutions that provide SMS loans with a regulatory base for establishing the identity of a client, especially upon first service provision, and with an obligation to register the client's economic activities. Whether such a regulation is reasonable in a free market 's in order to introduce the principles of "know your client" and responsible borrowing 's will be a matter of heated dispute.

Regardless, the draft law is a means for adjusting domestic law with EU directives. Taking into account the hazards of money laundering and terrorism financing, which may jeopardize the financial system of separate credit institutions as well as the whole state economy, effective regulation of this sphere is extremely important for every country.

The draft law includes several amendments aimed at providing and securing a more efficient system for preventing money laundering and terrorism financing and thereby stronger protection of credibility of Estonian financial sphere and economic territory.

One of the most important amendments is expanding the group of persons obliged to implement measures (diligence measures) for preventing money laundering and terrorism financing. The most important diligence measure is the obligation to establish the identity of the transaction party and his or her representative at the time when the business relationship was created. Pursuant to the draft law, the actual beneficiary must also be established in addition to identity. Thus the obligated person must identify whether the transaction affects the financial status of the transaction party itself or whether the transaction party is only an undercover agent controlled by an actual beneficiary.

The draft law provides a three-step system for implementing diligence measures. Depending on the risk level of money laundering or terrorism financing the obligation to implement the so-called common or intensified diligence measures is applied. Where the risks are low, simplified measures are permitted. In cases when the obligated person is not able to comply with the diligence measures, the person is prohibited to make the transaction or create a business relationship. If data and documents necessary for applying of diligence measures are not provided, then the obligated person has a right to terminate the contract before the prescribed time.

Certainly the draft law will be a great instrument in preventing money laundering and terrorism financing in that it will provide an obligation to give notice of suspicion of money laundering or terrorism financing inter alia in cases of a refusal to conduct a transaction or in case of termination of a contract.

In addition, the draft law includes a new provision pursuant to which obligated persons, except credit institutions, must give notice of any cash transaction exceeding 500,000 Estonian kroons (32,000 euros). Regulating cooperation between the Financial Intelligence Unit and the Security Police Board, final discharge of the obligated person to compensate damages if the person has performed the duties provided by law in good faith, and higher penalties should also assist in the fight against money laundering and terrorism financing.

Annika Vait is a lawyer at Teder, Glikman & Partnerid, a member firm of the Baltic Legal Solutions, a pan-Baltic integrated network of law firms, including Kronbergs & Cukste in Latvia and Jurevicius, Balciunas & Bartkus in Lithuania, dedicated to providing a quality 'one-stop shop' approach to clients' needs in the Baltics